Retirement: Unwelcome retirement surprises

June 19, 2012|By Rachel Sheedy | Kiplinger's Money Power

Kiplinger's asked financial planners from the National Association of Personal Financial Advisors what retirement surprises their clients most often encounter, and queried our Facebook community as well. The following are the top two responses. Preretirees, you are forewarned.

1. Your health care costs may be higher. According to Fidelity Investments, the average 65-year-old couple will spend about $400,000 out-of-pocket throughout retirement until age 92, not including long-term-care costs. Plus, those new to Medicare may find it's more costly than they bargained for. Although Part A of traditional Medicare, which covers hospital benefits, is free, you'll pay a premium for Part B to get coverage for outpatient services and a premium for Part D to get prescription-drug coverage. Add in the premium for a private medigap policy, which helps cover the costs that Medicare doesn't cover, and a couple can end up paying $6,500 a year in Medicare premiums alone.

High-income beneficiaries get an extra shock -- they are subject to a premium surcharge. Even if your income isn't always high, you can land in surcharge territory if you spike your income in one year with a Roth conversion, for example, or exercise stock options. The surcharge starts to kick in if your annual adjusted gross income (plus tax-exempt interest income) tops $85,000 if you are single or $170,000 if you are married filing jointly. Keep in mind that Medicare does not cover long-term-care costs.

2, You'll pay taxes on your nest-egg withdrawals. Uncle Sam gave you a free ride on taxes while you saved for retirement, but he's ready for his slice of your pretax retirement savings. When you withdraw money from a traditional IRA or 401(k), those dollars stashed away pretax have a tax bill attached to them, says certified financial planner Burt Hutchinson, of Fisher & Hutchinson Wealth Advisors. Money you pull from tax-deferred retirement accounts is taxed at your top ordinary-income tax rate, as high as 35 percent. So if you need $30,000 to buy a new car and you are in the 25-percent tax bracket, you'll need to withdraw $40,000 from your IRA to cover the cost of the car and the $10,000 tax bill on the withdrawal.

You can leave the money in tax-deferred retirement accounts until you hit 70 1/2, when you are required to take minimum withdrawals from IRAs and 401(k)s. If you have a large amount of money in those accounts, a sizable required minimum distribution may push you into a higher tax bracket. To ease the tax hit, consider tapping those accounts sooner rather than later. Another smart strategy: Start stashing money in a Roth IRA, which has no required minimum distributions and can be tapped tax-free.